Ever thought about making a bit of extra cash by renting out your home on Airbnb, or building a granny flat in your backyard? Or perhaps you’ve already jumped upon that bandwagon?
Renting out your home has been a popular strategy over the years to bring in an additional income stream. However, with the rapid rise of property values in Australia, the impact of Capital Gains Tax (CGT) has minimised or even eliminated the benefits of doing so.
While we would all love to increase our cash flow, it’s vital to be aware of CGT and its implications on the sale of a private home that has been used to generate rental income.
What is Capital Gains Tax (CGT)?
Capital Gains Tax (CGT) is payable on the gain you make when you sell a property that has been rented out.
Upon selling a rental house, you usually make a capital gain or a capital loss based on the asset’s original cost. If you’re selling a house in Sydney, then in most instances you’re likely to make a profit and be required to pay CGT. This means that the capital gain is added to your assessable income and may significantly increase your tax bill.
Your family home as your primary place of residence is exempt from CGT. However, as soon as you decide to rent out a room, your whole place, or a granny flat, then suddenly your home transforms into a partial or full investment property – and you become liable for CGT when it comes time to sell.
Is Airbnb for me?
Airbnb is an online marketplace which allows people to rent out their properties or spare rooms to guests. It provides a great opportunity to rent out a spare room without the long term commitment, or lease a holiday home that would otherwise remain unoccupied for much of the year.
There are definitely tax perks as well, including deductions on portions of your:
- Internet and phone bills
- Water, power and council rates
- General upkeep and repairs
- Interest on your mortgage
Often people see only the short term benefits of renting out their private home on Airbnb, being extra income in their pocket, but they overlook the implications of CGT at point of sale.
You need to be aware of the tax impact of your decision to use your private place of residence as a rental zone. Consider how this will work out for you in the long run. Will you actually end up with more money – or will this short income term stream be outweighed by the CGT trigger at point of sale?
If you’re young and living in one of Sydney’s wealthier suburbs or a high growth area for property, then you could find yourself being stung by CGT when it comes to selling your family home, even if that is a long way off. In this instance you may more likely to benefit from building a granny flat in your backyard as an income channel.
Should I set up a Granny Flat?
The term ‘granny flat’ simply refers to a secondary dwelling on your property, and can be attached to your home or a separate structure. In many instances, creating a new building is a more cost-effective and valuable option than renovating your home.
Building a granny flat in the backyard or transforming the old shed or garage has become increasingly popular. This reflects the rising house prices and young adults opting to live with their parents for longer, keep their independence, and pay lower rent while saving for a home loan.
A granny flat is a great option for an additional income stream. It is more like an investment separate to your home and is treated as such. A granny flat may boost the value of your property, so while there is an upfront cost, it is likely that this will be returned to you in income and gains.
CGT still applies where the flat is rented to third parties, however as the flat may be a much smaller percentage of your overall land, the impact may be lower than renting out your house.
What should I do?
Airbnb or building a granny flat is an excellent way to bring in extra income. But you need to ensure that you’ve chosen the best option to suit your situation, with CGT at time of sale in mind.
Obviously CGT implications could significantly outweigh the benefits of having extra pocket money from rental return in the short term. The extent of this equation is dependant on where you live, the percentage of land rented relative to your entire property, and other factors.
The key is to look at the facts and plan carefully to ensure that your decision to rent is financially worthwhile. If so, then consider the best ways to structure it to minimise your tax obligations.
Do these situations apply to you?
In certain instances, Airbnb or granny flat rentals on private land can certainly be financially viable, for example:
- You are unlikely to sell your home in the near future, you may be retired and don’t plan to sell in this lifetime, in which case the property would eventually become part of your estate;
- You live in a holiday location that is popular with tourists, but your home won’t necessarily appreciate much in value because of its distance from employment, education, transport options – or other reasons;
- The portion of your land that is rented is a small percentage of your entire block, for example a 60sqm granny flat in the backyard versus the entire 300sqm downstairs space of your home;
- You run an Airbnb “bed & breakfast” from a holiday house, but you have another property that is classified as your “primary place of residence” for tax purposes.
If you are renting out your private home as an additional income stream and you would like to learn more about the tax implications Contact us today for an assessment of your circumstances.